Rob Wesselo
Interview with Rob Wesselo
MANAGING PARTNER, INTERNATIONAL HOUSE SOLUTIONS
He lives in South Africa
While many property developers shy away from affordable housing, Johannesburg-based International Housing Solutions (IHS) has created a profitable model for such projects in South Africa and beyond. In a conversation with Janet ClarkIHS managing director Rob Wesselo discusses the reliability of lower income tenants as rent payers compared to wealthier ones, reveals the firm’s sweet spot for development size and explains its cautious stance on investment in the Johannesburg CBD .
South Africa faces a persistent housing shortage, partly due to Apartheid-era policies. In 1994, the housing deficit was estimated at 1.2 million units. Despite the government’s efforts, including the Reconstruction and Development Program and its evolution into the Pioneer Policy, the deficit has increased to over 2 million units.
Interventions such as the First Home Finance grant address affordability, but housing stock remains low, with total units in the affordable housing segment falling over the past five years. According to Center for Affordable Housing Finance in Africa (CAHF)it would be rare to see a private developer build homes that would sell for less than R750.00 (about US$40,800) as these developers “feel the cost of the project is not sustainable” with insufficient profit margins.
Defying industry norms, Johannesburg-based private equity manager International Housing Solutions (IHS) has nonetheless created a model for the profitable development of affordable housing in South Africa and beyond. The company was founded in 2005 by Cathal Conaty, who recognized the potential of affordable housing as an investment asset class.
According to IHS managing director Rob Wesselo – who joined the company in 2010 after a career as a lawyer and roles in property developers and the real estate divisions of major South African banks – affordable housing is a defensive asset class with good potential development.
IHS is raising money from investors, such as development finance institutions (DFIs) and pension funds, to build affordable homes with prices starting at R630,000 (about $34,700). The company earns income for its capital through individual unit sales and rental income. Additionally, for projects where units are rented, IHS sells the entire development at the end of a fund’s life cycle.
To date, IHS has grown 740 million US dollars in six mutual funds and launched a listed real estate investment trust (REIT). It has also expanded to Namibia, Botswana and Kenya.
DFIs investing in IHS funds may be impact investors, but they still expect a proper return on their investment, often equal to commercial returns, Wesselo explains. He says returns vary from fund to fund, but declines to disclose specifics. However, a case study from the Impact Investing Institute reveals that the IHS South Africa Fund II has a target gross internal rate of return (IRR) – the annual effective compound rate of return – of between 20% and 22%.
Wesselo says his passion for real estate stems from its tangible nature – the bricks and mortar that become the setting for people’s lives after construction. “It’s such a beautiful, moving element,” she notes. “I was a lawyer before I got into this and the differences are huge. I just like the reality of the asset class and I like the way, particularly in our market, the way it affects people.”
A reliable market if managed properly
Wesselo says affordable housing is a huge market and in high demand. IHS has not experienced significant non-payment or occupancy issues. Even in the midst of the Covid-19 pandemic, occupancy rates have remained strong, never falling below 89%. He points to TPN Credit Bureau data showing that people with lower incomes tend to be more consistent with their rent payments, while those earning R25,000 (about US$1,360) or more often have worse payment records.
However, he stresses the need for thorough credit checks on potential tenants and effective property management, without which things can “go horribly wrong”. IHS operates a dedicated property management business with over 200 staff members. Managing thousands of tenants across its portfolio, Wesselo describes property management as “the hard part” and “a very hands-on business”.
Dynamics by country
Across all markets, IHS has found its sweet spot in multifamily development ranging from 200 to 400 units. Despite initial skepticism in some countries, demand for these units has been strong. “They told us [for example] that Namibians will not live in them [apartments]. At the end of the day, it’s all relative [the] price point. If you can create quality amenities in places for people to be safe, we’ve found that demand is high.”
While this may be a reliable strategy for all four countries where it operates, the company tries to understand each market and adapt to the economic conditions and preferences of the residents.
For example, in the realm of detached houses, usually more suitable for outright sale than for rent, smaller plots of 350m.2 up to 400m2 with 200 m2 The house is particularly popular in South Africa, Namibia and Botswana. In Kenya, due to land availability and cost, IHS focuses on building high-rise buildings up to eight stories tall, which are taller than those in its other markets.
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An IHS deployment in Cape Town, South Africa
Despite the difficult conditions in South Africa, including a lack of electricity supply, Wesselo maintains that IHS still sees the country as a viable market for continued operations. He notes significant growth potential in neighboring Namibia, boosted by success oil exploration off its coast.
Wesselo describes Kenya as a dynamic economy that, despite fiscal challenges, has experienced strong growth. There was also a notable rise in house prices in the East African country. But it points to a key difference: unlike the other IHS markets, Kenya’s mortgage industry is notably underdeveloped. Limited access to mortgages means Kenya is primarily a rental market
Change in the investment climate
The industry has come a long way, says Wesselo. In the early days of the company, local South African investors did not understand the asset class. Global investors, on the other hand, recognized the potential returns from affordable housing but remained cautious about South Africa as an investment destination.
Sentiment has changed to the extent that IHS now counts large pension funds such as the Namibian Government Institutions Pension Fund (GIPF) among investors in its funds.
Since it focused on “green” affordable housing, IHS’s investor base has expanded even further to include impact and ESG investors with a climate focus. For example, some of the cornerstones in the company’s IHS Kenya Green Affordable Housing Fund are the UK Climate Resilience Programme, the European Investment Bank and the International Finance Corporation (IFC). All units built by IHS are certified green, aligned with the EDGE standard devised by the IFC in 2016. The EDGE standard focuses on three areas: water use, electricity consumption and materials used in construction.
Red flags in affordable housing
However, not all affordable housing projects are guaranteed to succeed.
Wesselo specifically cites the avoidance of investment in inner-city projects in Johannesburg’s central business district (CBD). Despite the region’s strong need for affordable or social housing, the risks – compounded by poor municipal management and inadequate services – are too great.
A typical example of these risks occurred in August 2023, when a fire in a neglected building in the CBD claimed over 70 lives. The happening highlighted the desperate lack of viable housing options, with many abandoned buildings illegally occupied and rented by criminal syndicates. Earlier this year, the Johannesburg Group’s forensic and investigative services had 188 active cases open which includes such occupied buildings. In addition, Wesselo points out that some local authorities in South Africa, including Johannesburg, do not adjust utility rates for affordable and social housing. “You could be paying the same drainage costs in a flat in the CBD as a huge house in Bryanston,” he says.
These conditions, Wesselo argues, create systemic risks in the region because they could lead to insurers not covering developments and banks not providing financing.
The IHS also avoids large-scale government projects, such as military housing. These projects are often stalled due to the challenges of securing adequately serviced land capable of accommodating a large number of units (often over 10,000), raising the risk beyond the company’s comfort level. “We had a project in our first fund where we waited over ten years for electricity, [which] it was [already] certified to be there,” Wesselo recalls.
IHS administrator Rob Wesselo contact information
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